Pump your breaks

For the first time in over 2 years, net borrowing for auto financing has become positive implying that banks have finally succeeded in luring in some car buyers to finance their vehicle purchases through the banking channels. In Sep-24, this comes after 26 months of consistently negative net borrowing. This is certainly an important development that coincides with a slight surge in volumetric sales of locally assembled vehicles, up 18 percent month on month.

First a note on the data availability based on which this analysis stands. As mentioned elsewhere in this column, a better picture of the current credit situation could be gleaned from data that record the number of borrowers, advances vs. repayments, and/or average loan sizes for different loan categories but SBP does not publish such statistics for public consumption, and therefore one can only rely on estimated borrowing trends. Specifically, the data that is available provides the “outstanding position” for credit/loans classified by a long list of borrowers. Under consumer financing are loans for cars. Net borrowing for auto loans (quoted in this piece) therefore is in fact, a change in outstanding loans between an nth month and (n-1) month, and indicates advances minus repayments in month n. If the number is positive, advances were higher than repayments and could “indicate” an increase in fresh loan approvals.

In the context of a positive net borrowing number in Sep-24, the assumption here is that fresh loans have been extended. At this time, the 6M Kibor is trailing 15 percent (down from a peak of 23%), while the policy rate has slid down to 17.5 percent (down from 22% in Jun-23). Undoubtedly, the market expects the SBP to loosen the noose on the monetary policy further. There is a clear pattern here that cannot be missed as bank lending rates decline.

If 35-45 percent of cars are financed through the bank, it stands to reason that a higher policy rate would discourage fresh demand. That’s what happened. Among other reasons, this remains the single biggest cause of subdued demand in the automotive market over the past two years which is visible from the data (see graph). Now with the policy rate moving down, the market expects auto loans—and car demand to a great extent—to rebound. Such expectations must be tempered. For one, the SBP tightened regulations on auto financing in 2021 and 2022 by reducing the loan tenors and putting a higher equity requirement, in a bid to reduce demand for cars, and ultimately the import bill. It is evident that the desired outcome was achieved, and new buyers took a step back from taking out expensive bank loans to purchase cars that were also becoming expensive.

For car demand to truly bounce back, and it very well might after two years of lull, two things must happen. One, the SBP will have to let go of its clasp on auto financing and allow banks to lend with relaxed terms; to start with, reverting back to the typical tenor period of 7 years. Two, the policy rate will have to slide down to single digits to make it worthwhile for any car buyer to take bank credit. While these two could primarily drive auto financing in the coming year, any progress achieved could easily be derailed if the economic recovery that Pakistan is experiencing goes off-track.